Definitive Guide for Deciding When To Retire | Personal Capital

We spend decades saving for a financially secure retirement.

So when the time comes, it can be exciting and a little bit overwhelming. With some serious financial considerations at play, deciding when to retire is a big decision.

Determining When to Retire

The traditional retirement age is around age 65. However, the best age to retire does not exist. When to retire is a personal decision that depends on individual preparation. But have you ever taken the time to determine what retirement looks like for you?

The specific date on which you start your retirement could impact several factors that affect your retirement finances. These include benefits from your former employer, Social Security distributions, and taxes, to name a few.

How Age Affects Retirement Savings Income

Even though there’s no perfect age to retire, the earlier you start to invest for retirement, the better off you will be due to the effects of compounding returns. Indeed, by starting early, you’ll likely need to invest less towards retirement because your investments will have more time to accumulate earnings in the stock market.

However, there are incentives to encourage you to invest in your retirement age even if you start later in life. There are tax-advantaged retirement accounts that allow you to contribute more towards your retirement when you are 50 and older. For instance, the 2022 maximum annual employee contribution limit for 401(k), 403(b), most 457 plans is $20,500, but there’s also a $6,500 catch-up contribution for any plan participant who is 50 and older.

Another way age affects your retirement is when it comes to social security benefits. There’s a concern that depending on when you retire, you might not get many benefits from Social Security. According to a 2020 Social Security Administration Trustees Report, by 2034, payroll taxes which provides most of the money for social security benefits is only expected to cover 78% of scheduled benefits.

In addition, even though social security benefits eligibility starts at age 62, to maximize your social security benefits, you should wait until age 70 to take social security benefits. Postponing taking Social Security until age 70 makes your monthly benefits 32% larger than it will be at your full retirement age. Keep in mind this is dependent on health and longevity factors as well, which is unique to each individual.

Here are seven factors to consider as you plan the best age and time of year to retire.

1. Do you have a pension?

If you work for the government or an employer that offers a defined benefit pension plan, it might be smart to retire on the day that follows the anniversary of your first day working there. This way, you’ll receive an extra year of service credit toward the calculation of your pension benefits.

2. Have you saved up any cash reserves?

Some financial advisors recommend saving enough money in a liquid cash account to cover the first few years of living expenses after you retire. Then you won’t have to tap into your retirement accounts if the market is down at the time when you begin your retirement.

Read More: 7 Ways to Save for Retirement

However, if you don’t have any cash savings and will need to start withdrawing money from your retirement account as soon as you retire, you may consider retiring either very early or very late in the year. This could allow you to avoid making retirement account withdrawals in a year when you might have earned income that would push you into a higher tax bracket.

3. Are you considering early retirement?

The age of 65 has long been considered the unofficial age for early retirement, but many people are opting for early retirement. If you plan to retire early, remember that you will be assessed a 10% penalty on withdrawals you make from a traditional IRA or 401k before you reach age 59½.

So if you will turn 59½ at any time during the year you plan to retire, you should wait until after your birthday to retire and begin taking distributions from these accounts in order to avoid this early withdrawal penalty.

Read More: When Can You Withdraw From Your 401k or IRA Penalty Free?

4. Will you have to take required minimum distributions (RMDs)?

Beginning in January 2020, the SECURE Act pushed the age at which individuals are required to begin withdrawing money from their retirement accounts back from 70.5 to 72. Additionally, the bill allows working individuals to continue to contribute to their traditional IRAs past the age of 70.5.

5. Will you work on a part-time basis after you retire?

Many people today are choosing to earn money as a freelancer or contractor in order to supplement their retirement savings. If you work part time and elect to start receiving Social Security benefits before you reach the full retirement age (FRA) — which is between 66 and 67 years old, depending on your birth year — your Social Security benefit amount may be reduced based on your earnings.

If you will:

  • Be under full retirement age for all of 2022, you are considered retired in any month that your earnings are $1,580 or less and you did not perform substantial services in self-employment.
  • Reach full retirement age in 2022, you are considered retired in any month that your earnings are $4,210 or less and you did not perform substantial services in self-employment.

If you’re retiring before reaching FRA but expect to earn more than $1,580 a month in income, and you will reach FRA sometime during the year you plan to retire, you should probably wait until after your birthday to retire and claim Social Security retirement benefits.

6. Do you have accrued vacation pay?

If you have accrued a significant amount of vacation pay with your employer, find out when they will pay you this money. This pay will be considered earned income and thus subject to the earnings rule explained above. You might want to wait until after you’ve received the funds to retire and apply for Social Security benefits.

Read More: What Age Can You Draw Social Security?

7. Will you turn 70 years old during the year?

By waiting until after you reach FRA to begin collecting Social Security benefits, you can increase the amount of your monthly benefit when you do eventually start receiving benefits. But this is only the case up until age 70, at which time the increases stop.

So if you will celebrate your 70th birthday at any time during the year you plan to retire, you should consider retiring and filing for Social Security after your birthday. After you reach 70 years old, you won’t receive any additional benefit to delay retirement and receive Social Security.

Our Take

There are many factors that go into deciding the best time of year to retire. How does retirement work? You can use Personal Capital’s free Retirement Planner to see how retiring at different times will impact your savings needs.

We recommend talking to your financial and tax advisors for more detailed guidance in your specific situation. Personal Capital financial planners can guide you in these and other important retirement decisions.

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